Wednesday, June 15, 2011

Today's links

1--Federal housing proposal would toughen debt restrictions on mortgages, Washington Post

Excerpt: Consumer borrowing is so rampant in the United States that most people who took out a mortgage last year to buy a home ended up spending more than a third of their income to pay that loan and other debts.

Now, a federal proposal would target borrowers with heavy debt loads by making it tougher for them to get the cheapest mortgages. The initiative is part of a broader measure that aims to prevent another foreclosure crisis and could confront borrowers who do not meet certain conditions with higher interest rates and fees.

The debt restrictions are on top of other conditions, including a requirement that borrowers pony up a 20 percent down payment to qualify for the cheapest mortgages....

“The debt limits are far and away the most binding constraint,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s probably the one thing that will knock the largest number of borrowers out of the market by keeping them from getting the most favorable rates.”...

Nearly three out of every five U.S. borrowers who bought homes last year would not have met the proposed restriction on total debt, according to an analysis by mortgage research firm CoreLogic.

2--The Sickness Beneath the Slump, Robert Shiller, New York Times

Excerpt: THE origins of the current economic crisis can be traced to a particular kind of social epidemic: a speculative bubble that generated pervasive optimism and complacency. That epidemic has run its course. But we are now living with the malaise it caused.

News accounts of the economic crisis rarely put it in these terms. They tend to focus on distinct short-term developments or on the roles of prominent people like Federal Reserve governors, members of Congress or Wall Street financiers. These stories grab attention and may be supported by some of the economic statistics that the government and private institutions collect.

But the economic situation is primarily driven by hard-to-quantify sociological factors that play out over many years.

The uptick in the unemployment rate, to 9.1 percent from 8.8 percent two months earlier and the drop in stock prices over the last month have attracted notice, yet in a sense they are symptoms of a deeper economic sickness....

Even for people who have other reasons to buy a house, there may be little urgency to do so. Our 2011 survey found that the median expectation for home price appreciation next year is just 1 percent. So it won’t be surprising if new home sales remain abysmally low and few jobs are created in the hard-hit construction industry. And it shouldn’t be a shock if the personal savings rate stays at around 5 percent, as it has recently, up from around 1 percent in 2005. This would mean that consumer spending will not drive a strong recovery.

3--Rosenberg Says 99% Chance of Another Recession by 2012, Mish

Excerpt: In a Bloomberg video David Rosenberg, chief economist at Gluskin Sheff & Associates, says there is a 99% Chance of Another Recession by 2012. Rosenberg also talks about the outlook for the U.S. economy....(video)

Bloomberg: How Certain are you that we may be headed for a recession

Rosenberg: I think that by 2012, I would give it a 99% chance. I say that because as an economist, you have to be part historian. When you have a manufacturing inventory cycle recession, they are usually separated 5 years apart. But when you have a balance sheet recession, credit contraction, asset deflation (for example residential real estate), the downturn tends to be separated every 2 to 2.5 years. ... Economists call this a soft patch. It's not like this is a soft patch. Basically, when all the stimulus is gone, you get to see what the emperor looks like disrobed. It's not a pretty picture.

4--Roubini Warns Of Euro Break Up As Greek Credit Rating Tumbles, Forbes

Excerpt:a gloomy commentary by Nouriel Roubini who warned that “the Eurozone heads for break up.”

“The muddle-through approach to the eurozone crisis has failed to resolve the fundamental problems of economic and competitiveness divergence within the Union. If this continues the euro will move toward disorderly debt workouts and eventually a break-up of the monetary union itself as some of the weaker members crash out,” stated Roubini, also known as Dr. Doom, in an op-ed for the FT.

Roubini’s view echoes S&P’s, which downgraded Greece’s long-term sovereign debt rating to CCC from B, effectively making it the “lowest rated sovereign in the world, having fallen below Ecuador, Jamaica, Pakistan, and Grenada.” The latest downgrade of Greece’s sovereigns is tied to “a significantly higher likelihood of one or more defaults” probably in the form of commercial debt restructuring. What was once an emergency option reserved for the worst-case scenario, giving bondholders a haircut while extending maturities, is now essentially seen as a given by most market participants. “Debt restructuring will happen” wrote Roubini, “the question is when (sooner or later) and how (orderly or disorderly).” (Read Greece: Preemptive Debt Restructuring Or Eurozone Exit)......

The only way to restore peripheral competitiveness, then, is by exiting the monetary union. “Leave the euro, go back to national currencies and achieve a massive nominal and real depreciation,” wrote Dr. Doom. The “Eurozone exit” option comes with a heavy burden, as it would imply “major real depreciation and capital losses on the creditor core,” being especially painful to Germany and its banking sector, but also hurting France and the rest of the Eurozone.

5--U.S. Retail Sales Fall on Weak Auto Demand, Bloomberg

Excerpt: Sales at retailers fell less than forecast in May, showing American consumers were overcoming elevated gasoline costs.

The 0.2 percent decrease followed a 0.3 percent April gain that was smaller than previously estimated, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News was a drop of 0.5 percent. Excluding autos, purchases climbed 0.3 percent.

Ebbing energy costs and a rebound in autos following the disaster in Japan mean household purchases, which account for about 70 percent of the economy, may improve in the next six months. Even so, chains including Limited Brands Inc. missed analysts’ estimates for May as fuel prices climbed to the highest level in almost three years and unemployment topped 9 percent.

“Consumers are cautious, but they are not panicking,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who accurately forecast the gain excluding autos. Americans are “taking higher food and energy prices relatively well. We should see consumer spending pick up in the second half.”

6--ECRI’s Achuthan: Prolonged U.S. Slowdown Underway, Wall Street Journal

Excerpt: The U.S. economy is “not yet” headed for a double-dip recession, but a sharp and prolonged downturn is underway and may make jobs growth even tougher to come by, an influential analyst said Monday.

In an interview with The Wall Street Journal, Lakshman Achuthan, the co-founder of the Economic Cycle Research Institute, said that over the last few months key indicators of long-term economic growth have all begun pointing in one direction: downward.

“We’re talking about a cyclical turn that’s pronounced pervasive and persistent, not a one or two month affair,” Achuthan said. He added that the slowdown is likely to last a couple of quarters at least — even as he stopped short of calling it a formal recession, which is defined by two quarters of economic contraction.

“This isn’t a story about one country driving [growth] down: China didn’t do this, and the U.S. didn’t’ do this,” he said. “It’s very big…and not something you can deny.”

That means this summer could bear a striking resemblance to last, when a stuttering economy prompted the Federal Reserve to raise the curtain on its controversial $600 billion quantitative easing program. That program will end this month, just as the economy appears to be losing momentum.

“The broad economy is going to slow alongside the industrial sector starting in the middle of this year, so in that sense it may feel like last year,” Achuthan said, adding that closely watched gauges of economic growth will all begin slowing at the same time. “It’s all going to be synchronized.”

7--U.S. Macro in Three Charts: Credit Flows, The Big Picture

Excerpt: The U.S. is suffering from insufficient aggregate demand the result of the bursting of the 2004-07 credit bubble. The consumer led economy financed by borrowing, much of it backed by home equity, has given way to massive private sector deleveraging as reflected in the charts below. To cushion the blow, the federal government stepped up deficit spending in an effort to replace the decline in demand. This is clearly illustrated in the charts below.

The latest data from the Federal Reserve’s Flow of Funds Accounts show that private domestic credit borrowing of the non-financial sector is still at very anemic levels (see middle chart) . Though total private non-financial credit growth was flat in Q1, corporate continued to strengthen and consumer credit was positive for the second straight quarter. This was offset, however, by continued deleveraging in the mortgage and non-corporate business sector. The negative borrowing is likely both supply and demand constrained.

The charts are revealing as they also illustrate the sharp Q1 drop in public sector borrowing with state and local government turning negative. Unless private credit significantly improves — net mortgage lending turning positive, for example – to help finance the expansion of domestic demand, the economy will likely remain sluggish as the crunch in public spending continues. After all, President Obama did say that “the flow of credit is the lifeblood of our economy.”

Corporate spending and the export sector will have to do the heavy lifting as the U.S. works its way through the credit mess. The President needs a positive Black Swan event, such as the explosion of the internet, which drove high levels of investment spending during the Clinton Administration, for example.

8-- Jobs Program? Robert Reich, Economist's View

Robert Reich visits Washington D.C. and asks about a jobs program:

... I made the rounds of Washington Democrats, repeatedly asking why no bold jobs plan is emerging. Here’s a sample of their responses:

“Dead in the water. We’ll be lucky if we get votes to raise the debt ceiling without major spending cuts this year and next.”

“Are you kidding? It’s all budget deficit, budget deficit, budget deficit. Nobody’s thinking about anything else.”

“Republicans beat us up so bad over the first stimulus there’s no way we’re gonna try for a second.”

“We got [Republicans] cornered on Medicare. Now they want to change the subject to jobs. Forget it.”

“No need. We’ll see job growth in the second half of the year.”

“The President doesn’t want to put anything on the table he can’t get through Congress.” And so it went. Not a shred of urgency....

9--NFIB: Small Business Optimism Index decreases in May, Calculated Risk

Excerpt: From National Federation of Independent Business (NFIB): Consumer Spending Remains Weak: Small Business Optimism Dips Lower in May

The Index of Small Business Optimism fell 0.3 points in May to 90.9. This month marks the third monthly decline in a row. The proximate cause is the fact that 1 in 4 owners still report weak sales as their top business problem. Consumer spending is weak, especially for “services,” a sector dominated by small businesses.
...
Twenty-five (25) percent of the owners reported that weak sales continued to be their top business problem...

Weak sales is still the top business problem with 25 percent of the owners reporting that weak sales continued to be their top business problem in May. In good times, owners usually report taxes and regulation as their biggest problems.

The recovery continues to be sluggish for this index, probably somewhat due to the high concentration of real estate related companies.

10--The Rise of the Second-String Psychopaths, David Schwartz, Common Dreams

Excerpt: It is no secret that the Koch brothers and others of the super-rich seem to have undertaken a final push to consolidate control through the conversion of a marginally democratic to an essentially fascist state; extreme right-wing, authoritarian, and demagogic. This kind of government is ideal for control of a populace by the moneyed elite. To carry this out requires the employment of many ‘kept’ politicians to excite and misdirect scared and angry – and ignorant – voters. Lest the citizenry realize who stole their money and storm their castles with torches, the rapacious elite need politicians who will carry out the work of re-directing anger at teachers, or labor unions, or the poor. I can only conclude that the people who now own the country couldn’t find any first-rate psychopaths to carry out their work. Or maybe the smart ones were all occupied. So they had to go to second-stringers, people who could actually believe what they were told to say.

We are a country who has become second-best, even in the quality of our psychopaths.

11--It's the debt, Dummy, Burning Platform

Excerpt: I think charts tell a story that allows you to disregard the lies being spewed by those in power. Below are four charts that tell the truth about our current predicament. The first is from http://www.mybudget360.com/. The austerity and debt reduction storyline being sold by the MSM is a crock. The total amount of mortgage debt outstanding peaked at $14.6 trillion in 2008. The total amount of consumer debt (credit cards, auto loans, student, boats) outstanding peaked at $2.6 trillion in 2008. Today, mortgage debt outstanding stands at $13.8 trillion, while consumer debt stands at $2.4 trillion. Therefore, total consumer debt has declined by $1 trillion in the last three years. The MSM and talking heads use this data to declare that consumers have been paying down debt. This is a complete and utter falsehood. The banks have written off more than $1 trillion, which the American taxpayer has unwittingly reimbursed them for. Consumers have not deleveraged. They have taken on more debt since 2008. GMAC (Ally Bank) is handing out 0% down 0% interest loans like candy again.

In order for this economy to become balanced again would require consumer debt to be reduced by $3 to $4 trillion and the savings rate to double from 5% to 10%. This will never happen voluntarily. Americans are still delusional. They are actually increasing their debt as credit card debt sits at $790 billion, student loan debt at $1 trillion, auto loans at $600 billion, and mortgage debt at $13.8 trillion. The debt will not decline until an economic Depression wipes out banks and consumers alike. America will go down with a bang, not a whimper.

Household net worth peaked at $65.8 trillion in Q2 2007. Net worth fell to $49.4 trillion in Q1 2009 (a loss of over $16 trillion), and net worth was at $58.1 trillion in Q1 2011 (up $8.7 trillion from the trough). So, household net worth is still down by $7.7 trillion from its 2007 peak. The really bad news is that the real estate portion of household net worth dropped from $22.7 trillion in 2007 to $16.1 trillion today, a $6.6 trillion loss. Real estate continues to fall.

You can clearly see who benefitted from the monetary and fiscal stimulus implemented by Bernanke, Geithner, and Obama. If household net worth is up $8.7 trillion from the trough in early 2009, but real estate has continued to fall. This means that the entire increase in net worth came from stock market gains. As you may or may not know, the top 10% wealthiest people in the US own 81% of all the stocks in the country. The other 90% own virtually no stocks, so they have been left with depreciating houses and inflating bills for energy and food. The top 10% are about to take another multi-trillion dollar hit in the next six months as QE2 ends and the stock market implodes. This will knock the country back into deep recession...

The banks made it as easy as hitting the ATM to get equity out of your house and the Boomers jumped in with both feet, as usual. Americans withdrew $2.8 trillion of fake equity from their homes between 2003 and 2007. They lived the lifestyles of the rich and famous. BMWs, Mercedes, cement ponds (pools), new kitchens, Jacuzzis, home theaters, exotic vacations, hookers, facelifts, size DDs, and putting a little more in the church basket abounded....

It should be clear to anyone that we have a bit of a debt problem. The government solutions jammed down our throats since 2008 have added $7 trillion of debt to the national balance sheet. The only thing keeping this house of cards from collapsing immediately has been the extremely low interest rates put in place by the Federal Reserve. The end of QE2 potentially could result in interest rates rising. If interest rates were to rise 2%, this country’s economic system would implode. Time is not on our side. The debt cannot be repaid. The debt cannot be serviced. The debt has destroyed this country. Years from now when historians ponder what caused the great American Empire to collapse, the answer on the exam will be:

IT WAS THE DEBT, DUMMY.

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